By Mark Sonnenberg, SIOR, CCIM

Featured in the Society of Industrial and Office Realtors® (SIOR) national publication, Professional Report, May 2007

“I’ve been working on the railroad” has returned as a familiar refrain heard across the country. America’s railroads are spending billions each year to keep up with increasing demand for hauling freight. Last year alone, U.S. freight railroads spent $8.3 billion to improve roadways and structures and equipment, according to the Association of American Railroads (AAR).

“Over the past 10 years, railroad spending for capital expenditures has averaged 18 percent of the freight haulers’ revenues,” says Tom White, AAR spokesman. That’s four times greater than the 3.8 percent of revenues spent in the manufacturing sector, which demonstrates the railroad industry’s commitment to increasing capacity and efficiency.

Intermodal shipments are the primary driver of the railroads’ hurried pace of expansion, along with record amounts of coal shipped from the Powder River Basin and elsewhere. Consumer and manufactured goods actually overtook coal as the top freight category in 2003, White reports. And while domestic shipments of products destined for distribution across the country and for export are an increasing part of the mix, the influx of imported goods stands out as a key component in the growing importance of railroads in the intermodal market.

In fact, intermodal volume set a new record of 3.7 million loads in the third quarter of 2006, according to the Intermodal Association of North America’s (IANA) Market Trends and Statistics report published in early November of last year. Imports spurred an 8.6 percent rise in international traffic during the quarter, marking the 18th consecutive quarter of growth, according to the IANA.

With international intermodal shipping growing at a 15 to 20 percent a year, imports are the leading factor in this explosion. In particular, China has become a colossus in the global economy. Goods from China shipped on massive 8,000-container ships unload the equivalent of 27 double stack-container trains that would stretch for 41 miles or a series of tractor trailers that would line up for more than 80 miles.

In a presentation last year, Skip Kalb, director of strategic development for BNSF Railway, noted that China accounted for 70 percent of the Asia Pacific imports landing on the West Coast. And there’s no end in sight as such imports led by China are expected to climb nearly eight percent annually over the next four years.

The Return of the Iron Horse

Intermodal shipments are a huge part of the railroad’s resurgence, but other factors are playing a role in the return of the golden age of railroads.

In the 1950s, America embarked on building its massive interstate highway infrastructure, which, pardon the pun, placed trucking in the driver’s seat. As freight volume diminished, railroads pared back their investments, particularly in real estate.

By the 1980s, though, imports began to take center stage, and it became increasingly clear after partial de-regulation that railroads would have an opportunity to become an important part of moving goods efficiently from ports to distribution centers across the country.

The cost-effectiveness and efficiency of railroads have become even more prevalent as the trucking industry faces several challenges: rising fuel costs, tougher emissions standards that will require immense investments in new equipment, tighter regulations of hours of service rules for drivers, and rising insurance premiums. Plus, the trucking industry faces a critical shortage of long-haul drivers, with estimates placing the shortage of truck drivers at 110,000 by 2014.

“There are probably three factors driving intermodal demand for railroads,” White notes. “The first is the increased cost of fuel (rail is about three times as fuel efficient as truck). The continuing driver shortage faced by the trucking industry is another. And the third is the growth of international trade.”

White adds, “The growth of both exports and imports mean that large volumes have to move long distances, either from port to markets or from production facilities to ports. The rail advantage over highway grows as distance and volume increase.”

Industrial Revolution

Against this backdrop, SIOR brokers from across the country have seen unprecedented demand for industrial space, especially large modern bulk facilities served by railroads. Numerous developments have been completed or are in the works across the country to satisfy this demand.

In particular, many developers and the railroads are looking outside the West and East Coasts, the nation’s primary ports that are rapidly nearing capacity. (The longshoreman’s strike on the West Coast a few years ago also led many companies, especially retailers such as Wal-Mart, Target, and Costco, to rethink their distribution strategies and locations).

Michael R. Haverty, chairman and CEO of Kansas City Southern (KCS), noted in a presentation last October that Los Angeles and Long Beach are nearly at 80 percent of their capacity. Instead, railroads are often looking to the Heartland to ensure capacity is increased to meet rising demand from intermodal shipments.

Terry Stieve, SIOR, a senior vice president for Colliers Turley Martin Tucker in St. Louis, has seen this increased interest as the Gulf Coast becomes an important shipping/intermodal lane, as well as the Mexican port of Lazaro Cardenas.

“In recent years, Wal-Mart built two side-by-side distribution facilities totaling four million square feet near the Houston port on the Gulf, and other retailers such as Home Depot have followed Wal-Mart’s lead,” Stieve notes.

In all, more than one-third of Wal-Mart’s containers now go through Houston, Stieve says. St. Louis will gain in stature as a major distribution hub as international shipments arrive in ports outside the West Coast. “The significance of that to St. Louis is that now those containers are coming 1,000 miles closer than they were before. We are perfectly centered, we have the land and we have the railroad (the nation’s third largest track system), air, water, and highway infrastructure. Things are not just changing a little bit, they’re changing dramatically,” Stieve says.

As examples, he points to Gateway Commerce Center across the river in Illinois. Since its start in 1998, more than 6.6 million square feet of space has been built there, including large distribution centers for Hershey Foods, Procter & Gamble, Unilever, Dial, Lanter, and Buske Lines. Just minutes from the St. Louis Arch, Gateway Commerce Center has established a base for regional distribution centers and logistic services. And there’s still room for the development to grow.

Near the massive Gateway development, Triple Crown Services built a $7 million intermodal facility on 62 acres in Edwardsville, IL, and Lakeview Commerce Center recently opened on 600 acres with the potential for 6.5 million square feet of distribution space when completed. Ozburn-Hessey also has four million square feet of flexible distribution space to serve a number of companies bringing products to market.

Midwestern cities already established as major players in the regional/national distribution channel stand to benefit from investments in intermodal facilities as well. Take Indianapolis, which already boasts more than 223 million square feet of industrial/manufacturing space. A planned intermodal hub in Plainfield, the Indianapolis area’s largest base of modern bulk distribution, will only catapult its importance.

“The evolution of an intermodal hub in Plainfield combined with the continued price increase for oil and gas may lead to more rail requirements in the months ahead as companies look for cheaper ways to ship goods,” says John Huguenard, SIOR, senior vice president in Colliers Turley Martin Tucker’s Indianapolis office.

Coupled with this, Indianapolis is improving its ports as well, which soon may allow railroad freight to move directly to Indianapolis instead of first passing through Chicago, a city that has become a bottleneck for freight, Huguenard says.

Kansas City: Here We Come

Perhaps there’s no more promising potential for huge intermodal facilities than in Kansas City, a town long known for its railroad connections. Two massive projects are in the works.

Burlington Northern Santa Fe (BNSF) has outgrown its existing Intermodal facility in Kansas City, Kansas, which in recent years has been finishing second only to BNSF’s Logistics Park-Chicago in intermodal volume growth on BNSF’s network. The railroad chose Kansas City, which has long served as a distribution center for much of the population in a five-state region, for its central location. It also helps that Kansas City is the second largest rail hub in the country. The combination of BNSF rail lines passing through the Kansas City area en route from the ports in Northern and Southern California and Kansas City’s freeway network created the opportunity for BNSF’s third logistics park in the Kansas City area.

BNSF will begin construction on a 1,000-acre industrial development near Gardner, Kansas, a growing community in the southwestern part of the metro area. Last October, BNSF reached an agreement with The Allen Group, one of the nation’s leading industrial development companies, to develop the logistics park.

Trains hauling container shipments from Southern California’s ports would use the facility to transfer cargoes to trucks so these goods can be hauled to regional destinations or be stored on site in warehouses. The logistics park will place distribution centers adjacent to the intermodal hub and may eventually offer as much as 10 million square feet of distribution space.

While it will take several years to complete, BNSF’s intermodal facility and The Allen Group’s logistics park will be a powerful engine for economic growth in the Kansas City area.

BNSF has been a leader in such facilities, with similar centers completed recently in Elwood (suburban Chicago), Illinois and Fort Worth, Texas.

As in those areas, BNSF’s intermodal facility and The Allen Group’s logistics park will build on Kansas City’s stature as a major trade thoroughfare, Kalb says. “This center represents a significant investment in BNSF’s future in the Kansas City region and it strongly enhances the area’s future role in the global economy.”

And BNSF and The Allen Group aren’t alone in targeting the Kansas City region. CenterPoint Properties has agreed to purchase 1,400 acres on the former site of the Richards-Gebaur Air Force Base that was shuttered in 1976.

Kansas City Southern led in the development of the former base in 2000 when the International Freight Gateway opened. The full-service automotive complex allows Mazda of North America to distribute Mazda Tributes throughout the United States and for export to 100 countries. Additionally, Mazda processes vehicles for shipment to Midwestern dealerships within a 300-mile radius.

The development’s next phase will further utilize KCS’ extensive rail operations leading to the site. Most importantly, it will link Kansas City to the Mexican Pacific Coast city of Lazaro Cardenas. The port is undergoing extensive expansion to create an alternative route from the increasingly congested ports of Los Angeles and Long Beach. Freight traveling from Asian ports to U.S. markets can be directed to Lazaro Cardenas where KCS can move it to the heart of the country.

Haverty noted in his presentation last October that future expansion at Lazaro Cardenas will add storage capacity for 1.8 million TEU’s (20-foot equivalent units) annually or the equivalent of more than 400 large container ships. He added that nearly 85 percent of those containers would then be loaded on rails for the trip through the heart of the country, with possible stops at several existing intermodal centers along the way or eventually to CenterPoint’s development in Kansas City.

Additionally, KCS can drop freight at the development or hand it off to four other rail carriers in the Kansas City area. These extensive rail operations give the Richards-Gebaur and the BNSF sites the added advantage of serving all of North America since goods can be shipped anywhere in the U.S., as well as to and from Mexico and Canada, an important link in the NAFTA trade channel.

These developments and dozens more across the country clearly show that railroads are driving growth both for the economy and in the nation’s industrial markets. SIOR brokers have joined the chorus in singing that happy tune: “I’ve been working on the railroad.”

Mark T. Sonnenberg, SIOR, CCIM, is a senior vice president and director of industrial sales and leasing for Colliers Turley Martin Tucker’s regional office in Kansas City, MO. Mark also serves on the advisory board of the Colliers MultiModal Services Group. He believes rail and road have placed Kansas City on the fast track to become a leader in the nation’s industrial and intermodal freight industries.

Intermodal Developments

The growth of intermodal container traffic, especially from the rising tide of imports from China, has challenged railroads to handle the load. Developers and the railroads have been working feverishly to meet this need with a number of projects throughout the country. Here are a few of the more publicized intermodal facilities either undergoing expansion, under development or in the planning stages:

• Union Pacific is working on a 342-acre intermodal facility with The Allen Group in South Dallas.
• Argent/ProLogis are jointly developing a 200-acre site near Union Pacific’s development.
• Hillwood Development Co. purchased an additional 1,670 acres on the north end of Alliance, Logistics Park Alliance in the Fort Worth area.
• The Chicago area actually handles almost as many container boxes as Los Angeles/Long Beach and New York/New Jersey combined. Consequently, a 457-acre facility is well underway in Sauk Village, IL, and a second development is taking place on an old LTV steel property on the south side of Chicago. The latter provides rail and barge options.
• As mentioned BNSF and CenterPoint have an immense intermodal/logistics center in Elwood, IL, with plans for developing 219 more acres and greatly expanding capacity in the coming years.
• CSX has purchased land in Winter Haven, FL, for an integrated logistics center, and it also has plans for an intermodal terminal in Chambersburg, PA.
• Development continues in the Inland Empire as well. An 8,500-acre development known as Southern California Logistics Airport is underway at the site of the former George Air Force Base in Victorville. Sterling Enterprise, DCT Industrial Trust and BNSF Railway are involved in the massive project.
• Canada has been active as well. A new intermodal terminal at the Port of Prince Rupert, B.C., is expected to open in the third quarter of this year. Canadian National Railway (CN) has made investments in new equipment to handle growth in traffic from the port.
• Canadian Pacific Railway (CPR) also expanded capacity at its intermodal terminals by investing more than $160 million on overhauls and new locomotives. Another $141 million was spent to increase intermodal capacity from the Port of Vancouver.

Mark T. Sonnenberg, SIOR, CCIM, is a senior vice president and director of industrial sales and leasing for Colliers Turley Martin Tucker’s regional office in Kansas City, MO. Mark also serves on the advisory board of the Colliers MultiModal Services Group. He believes rail and road have placed Kansas City on the fast track to become a leader in the nation’s industrial and intermodal freight industries.